Preparing for whatever the future serves up

Hennie and Hank are approaching retirement with money in their RRSPs and a mortgage-free house in Ontario.

She is 63, he is 59. They have two grown children, the younger of whom is still living at home on and off.

“I’ve been a full-time government employee for the past two years following a successful yet volatile career in the private sector,” Hennie writes in an e-mail.

Years of uncertainty and contract work made it difficult for her to plan and save.

Hank “has always been an entrepreneur who’s been able to reinvent himself,” Hennie writes.

Hank switched careers 10 years ago and is now an established salesperson. Because he relies on commission, “his income is difficult to predict and plan around,” she adds.

Together, they bring in a little more than $150,000 a year.

“We are looking forward to our retirement, but are worried that the money we have been able to save may not be enough to enjoy the things we planned while we’re healthy, or (horrors!), may not last as long as we live.”

Hennie wonders whether she should keep working past the age of 65 to save more. Hank is planning to work part-time when Hennie retires so they can spend more time together. The plan is to sell their city home and move to a less expensive town, Hennie writes. “Personally, I’d like to stay in our house for as long as we can.” Their retirement spending goal is $72,000 a year after tax plus another $8,000 for travel.

They have a few other questions as well.

We asked Josh Miszk, vice-president of investments at Invisor.ca of Oakville, Ont., to look at Hank and Hennie’s situation. Mr. Miszk holds the chartered financial analyst and certified financial planner designations. Invisor.ca is an online portfolio manager or robo-adviser.

What the expert says To cover their monthly expenses of $6,000 and an annual vacation of $8,000, the couple will need about $96,000 in pretax income from their investments, government benefits and pension each year. Assuming their pensions and benefits are taken at the age of 65, Hennie’s Old Age Security, Canada Pension Plan and work pension ($8,150 a year) will account for about $28,000 a year, while Hank’s CPP and OAS will be just under $18,000 in today’s dollars. Excluding other expenses, the couple will need about $50,000 (in today’s dollars) from their investments each year. This amount will be about $20,000 more until Hank’s government benefits start.

Considering all expenses and assuming a life expectancy of 90 years, the couple will need about $1.1-million saved if they both retire in 2019, when Hennie is 65, the planner says. If Hank were to continue working full time until he turns 65, the couple would need about $935,000 saved by 2019. If the couple continues to save at their current rate, they should have about $925,000 saved up when Hennie retires in two years. This is assuming a 5-per-cent growth rate and 2-percent inflation.

“With no additional sources of income, the couple will fall short of their retirement savings by about $165,000 if they both retire in 2019,” Mr. Miszk says. However, they will be within $10,000 of their goal if Hank postpones retirement to age 65. “Ten thousand dollars is about 1 per cent of their savings goal and can be considered a rounding error over 25 years, so I would say they are on track for the retirement they want if they each retire at 65,” the planner says.

Must they sell their house?

Hennie and Hank’s expected net proceeds after all expenses from selling their house and buying a new one would be about $400,000. If Hank retires at 65, the couple will be on track to meet their retirement goal and could live in their current house as long as desired.

If Hank chooses to retire early, they would be roughly $165,000 short of their goal, so they could benefit from the added cash from downsizing. “But there is no immediate rush to do so.” In fact, they can hold off selling their home until 2036, when Hank will be 79, and still reach their goal. The net proceeds will likely be higher in 19 years as well.

Hank wonders whether he should postpone CPP and OAS benefits. Each month a person postpones receiving CPP and

OAS benefits after the age of 65 (to a maximum age of 70), the monthly amount they will receive will grow by 0.6 per cent multiplied by the number of months.

“Essentially, if you expect to live longer than the average Canadian [81 years], it may make sense to delay receiving the benefits,” Mr. Miszk says. “As a rule of thumb, for every three years you expect to live longer [or shorter] than average, you can postpone [or expedite] your payments by one year.”

He suggests Hank plan on taking his government benefits at the age of 65 and assess his health as he approaches retirement before deciding when to apply for CPP income. “In Hank’s case, we forecasted to age 90, about nine years longer than average, so it would make sense to postpone government pension benefits to age 68.”

As for their registered investments, because Hank’s income will be close to what it is today when he retires, there’s not much gained by contributing to his RRSP, the planner says. By using his tax-free savings account instead, he’ll have the flexibility to use the cash when needed without worrying about tax implications. “In addition, having a lower taxable income in retirement will keep the OAS clawback at bay.”

Hennie’s situation is different.

If she has unused contribution room in her RRSP (she has about $83,500), the tax break she gets is more than the amount of tax she will pay when withdrawing the cash in retirement, so it would be beneficial for her to continue contributing to her RRSP.

CLIENT SITUATION

The people: Hank, 59, and Hennie, 63

The problem: If Hennie retires soon, will they have to downsize and sell their house to meet their retirement spending goal?

The plan: If both work to 65, they will be very close to meeting their retirement goal.

If Hank chooses to retire early, they could benefit from downsizing, but there is no rush.

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